There has been a fair amount of press recently about the possibility of an iPhone nano. The rumors claim that Apple is working on a smaller version of the iPhone that would be cheaper in order to compete with the less expensive Android based phones. While Apple could produce a smaller form factor device with the same screen resolution as the 3GS I can see a couple of problems.
First, how well would the on screen keyboard work? Typing on the current iPhone/iPod Touch screen is a little marginal for me, so I can't see how an even smaller display would work with a virtual keyboard. Of course Apple could include a slide out keyboard instead. That would address the issue nicely but how much cheaper would a mini iPhone with a slide out keyboard be? Apple hasn't been hot on slide out keyboards in the past, but a different form factor might cause them to change their minds.
The second thing that makes me question these stories is that Apple is all about high margins. Right now they are making something like 50% of the profits on cell phone sales on 4% of unit sales and there are no signs that this very favorable phenomena is going to change any time soon. Even the early antenna woes of the iPhone 4 didn't seem to have any impact. Why would Apple want to create a product that would likely have substantially lower margins? I'm not saying it isn't possible, but it seems a bit of a long shot that they would make such a move. It might make sense in emerging markets though. If that is the intended audience then I'm betting on a slide out keyboard.
Image via CrunchBase
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